GCR accords an indicative Bond rating of AA-(NG) to Lagos State Govt.of Nigeria’s N100bn Bond Issue

11 Jul 2017 In Rating Notifications

GCR accords an indicative Bond rating of AA-(NG) to Lagos State Govt.of Nigeria’s N100bn Bond Issue

Lagos, 11 July 2017—Global Credit Ratings has assigned an indicative public rating of AA-(NG) to Lagos State Government of Nigeria’s (“Lagos State”, “the State”, or “the Issuer”) proposed Programme 3 Series II N100bn Fixed Rate Bonds (“the bonds”); with the outlook accorded as Stable. The indicative bond rating will expire on July 31 2017.

The assigned indicative public rating of the Bonds are premised on its Senior Unsecured status. Should the status of the Bond differ from that initially contemplated, this could impact the final ratings accorded. The final rating will be accorded upon receipt of satisfactorily signed and executed transaction documents.


RATING RATIONALE

Lagos State is in the process of raising funds from the capital market to be utilised in various infrastructural development programmes. The proposed Series II bonds [under the N500bn bond issuance programme (“Programme 3”)] will be the fifth bond issuance since 2009, and would be issued in tranches of seven (tranche I) and ten year (tranche II) maturities. Semi-annual interest will be made from the revenue of the State, whilst principal repayments will begin after 36-month and 60-month moratoriums on tranches I and II respectively. The net proceeds from the proposed Bond Issue will be utilised to further accelerate development, with a significant amount to be allocated to the construction and/or upgrading of roads and bridges, tourist sites and facilities, arts and culture facilities, as well as the development of waterways transportation and upgrade of health, social and environmental facilities.

A Sinking Fund for the repayment of obligations under the proposed Programme 3 Series II Bonds will be established and funded by an Irrevocable Standing Payment Order (“ISPO”), to be approved by the Federal Ministry of Finance, and transfers from the Consolidated Debt Service Account (“CDSA”) which covers principal redemption and the interest cost. As a result, a notch rating uplift from the Issuer rating is considered appropriate for the Bond

As the Series II Bonds will be senior unsecured obligation of the Issuer, any change in the rating assigned to the Issuer will directly affect the Bond rating. Lagos State’s Issuer rating was affirmed at A+(NG) in August 2016, with the outlook accorded as Stable.


RATING RATIONALE OF THE ISSUER

As a result of lower statutory receipts and Internally Generated Revenue (“IGR”), total revenue declined by 6% to N384bn in FY15 (82% of budget). The decline in statutory receipts to a 6-year low of N43.8bn was attributed directly to the lower oil prices and the negative impact this had on the National Treasury, while IGR (inclusive of VAT receipts) also dipped 3% to N340.6bn due to the slowing economy. IGR receipts in 1H FY16 were in line with budget, reflecting the state’s economic resilience amidst the tough economic climate. However, at just N13m, statutory receipts were well below budget, and although greater allocations are likely as the year progresses, these receipts are now expected to be well below forecast.

As Lagos State was able to reduce costs in certain areas, recurrent expenditure was slightly lower at N240.6bn in FY15. This saw the State report a N193.5bn operating surplus, which covered debt service charges by an unchanged 3.9x. After accounting for interest, the net operating surplus equated to a reduced 37.4% (F14: 40.5%). As at 1H FY16, the operating surplus was somewhat lower at N67bn, owing to higher overheads. GCR did request accounts as at end FY16, but this was not provided, as the audit process for 2016 is yet to be concluded.

Arising from the expanded capex programme, debt rose to a high of N619.3bn at FY15 before increasing to N834bn at FY16, as a result of new borrowings and the forex translation impact on external loans. This is partly moderated by the N111bn in cash in the debt service accounts at the end of January 2017, maintained to meet interest and principal repayment on the bonds as they fall due. Resulting from the higher debt, the gross debt to income ratio is projected to have risen above 200% at FY16 (FY15: 161%), while on a net basis, it will register around 160%.

NATIONAL SCALE RATINGS HISTORY


* Indicative rating.


ANALYTICAL CONTACTS

Primary Analyst
Kunle Ogundijo
Analyst
Lagos
+23 41 462 2545
.(JavaScript must be enabled to view this email address)


Committee Chairperson
Dave King
Chairman
.(JavaScript must be enabled to view this email address)


APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Criteria for Rating Public Entities, updated February 2017
Lagos State Government Rating Reports (2011 – 2016)
Glossary of Terms/Ratios (February 2017)


RATING LIMITATIONS AND DISCLAIMERS

ALL GCR’S CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.COM.NG/UNDERSTANDING-RATINGS. IN ADDITION, GCR’S RATING SCALES AND DEFINITIONS ARE ALSO AVAILABLE FOR DOWNLOAD AT THE FOLLOWING LINK: HTTP://GLOBALRATINGS.COM.NG/RATINGS-INFO/RATING-SCALES-DEFINITIONS. GCR’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, PUBLICATION TERMS AND CONDITIONS AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE AT HTTP://GLOBALRATINGS.COM.NG.

SALIENT FEATURES OF ACCORDED RATINGS

GCR affirms that a.) no part of the rating was influenced by any other business activities of the credit rating agency; b.) the rating was based solely on the merits of the rated entity, security or financial instrument being rated; c.) such rating was an independent evaluation of the risks and merits of the rated entity; d) the indicative rating is valid until July 31 2017.

Lagos State participated in the rating process via teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.

The credit rating has been disclosed to Lagos State with no contestation of the rating

The information received from Lagos State Government of Nigeria and other reliable third parties to accord the credit rating included
• The audited half year accounts for the period ended 30 June 2016;
• Draft documents relating to the Bond Issue- Pricing Supplements and Trust Deeds.
• Due diligence report from the solicitors

The ratings above were solicited by, or on behalf of, the rated client, and therefore, GCR has been compensated for the provision of the ratings.

 

 

 

 

 

 

 

 

 

 

 

 

ALL GCR CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS, TERMS OF USE OF SUCH RATINGS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS, TERMS OF USE AND DISCLAIMERS BY FOLLOWING THIS LINK:HTTP://GLOBALRATINGS.COM.NG/UNDERSTANDING-RATINGS. IN ADDITION, RATING SCALES AND DEFINITIONS ARE AVAILABLE ON GCR’S PUBLIC WEB SITE AT HTTP://GLOBALRATINGS.COM.NG/RATINGS-INFO/RATING-SCALES-DEFINITIONS. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES.  GCR’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE UNDERSTANDING RATINGS SECTION OF THIS SITE.

ALL GCR CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS, TERMS OF USE OF SUCH RATINGS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS, TERMS OF USE AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.COM.NG/UNDERSTANDING-RATINGS. IN ADDITION, RATING SCALES AND DEFINITIONS ARE AVAILABLE ON GCR’S PUBLIC WEB SITE AT HTTP://GLOBALRATINGS.COM.NG/RATINGS-INFO/RATING-SCALES-DEFINITIONS. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. GCR'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE UNDERSTANDING RATINGS SECTION OF THIS SITE.

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